Tariff rates in gravity

Abstract

This paper considers the case where multiple tariff schemes (e.g. general and preferential schemes) are available between trading countries. We incorporate these tariffs into gravity equations and estimate them by the Pseudo-Poisson maximum likelihood technique. The results show that omitting either tariff type leads to significant estimates biases. If fixed effects to control other tariffs are not included in the model, both preferential and general tariffs are to be introduced in the gravity equation. Indeed, some estimation results for precision metals show that reducing both types of tariffs contributes to significantly increasing trade values. However, reducing general tariffs does not always have a trade-enhancing effect. In leather products, for example, its impact was insignificant. Nevertheless, the reduction of preferential tariffs was again found to increase trade values significantly.